What is Forex Trading and how does it work?
You have probably heard in the news that a specific currency has gone up and another currency has gone down relative to the other. So, what does this mean? Well, this has all to do with Forex trading and the forex market.
The values of foreign currencies vary relative to each other every day. These movements in the values of currencies profit the forex traders.
What is Forex Trading?
Forex trading, also known as foreign exchange trading, is simply the exchange and trade of currencies to gain profit. It is an investment method that involves trading one currency for another.
The main objective of forex trading is to predict whether the value of one currency will go up or go down in comparison to the other. A forex trader purchases one currency and sells the other. A trader purchases the currency whose value is predicted to increase and sells the other whose value is predicted to go down.
The rate of exchange keeps fluctuating constantly, depending upon the supply and demand. The exchange rate of a currency can be affected by certain other factors including inflation, interest rates, political events, natural disasters, etc.
The minimum amount you need to open a forex trading account on a forex trading platform such as ic markets minimum deposit would be as little as USD 200.
What are Currency Codes?
There are more than 170 currencies worldwide. Every currency is assigned a three-letter specific code in the forex market that helps you identify that particular currency easily. For example, the code for Euro is ‘EUR’ and the code for pound sterling is ‘GBP’. Some other currency codes are as follows: USD for U.S Dollar, CHF for Swiss Franc, AUD for Australian Dollar, CAD for Canadian Dollar, JPY for Japanese Yen, etc
How does Forex Trading Work?
Currencies are always traded in pairs, known as ‘currency pairs’, in forex trading. The reason behind this is whenever a trader buys one currency; he or she simultaneously sells the other.
Every currency pair is composed of two parts: Base currency and the quote currency. Let us consider this example, EUR/USD. We can interpret this currency pair in such a way that the currency on the left, that is EUR, is the base currency while the currency on the right is the USD is the quote currency.
It depends on the exchange rate and how much of the quote currency is required to buy one unit of the base currency. That is why the base currency is always written as 1 unit while the quote currency changes according to the current market and the quantity that is required to buy one unit of the base currency. For instance, if the USD/EUR exchange rate is 1.3, it means 1 EUR will buy 1.3 USD. When the exchange rate increases, it means that the base currency has gone up in value in comparison to the quote currency. In contrast, the exchange rate decreases, which means that the base currency has gone down in value.